Crops > Outlook & Prices > Outlook & Prices
February 2022
Drought elsewhere helps
The old joke in agricultural marketing is "What is the cure for high prices? High prices." The longer high prices stick around, the more customers look for substitutes or alternative (and cheaper) suppliers. But when those other suppliers are having issues with supplies themselves, those higher prices can stay around for a good time longer. That is the situation seemingly setting up in the crop markets. US crop prices have been high and our international customers have been looking for alternatives, but the search is getting harder as the drought in South America is limiting those alternative supplies coming from there.
Traders have been tracking the USDA projections for South American crops over the past few months. Each month, those projections move a bit lower. The February update provided some additional downward movement on South American production, roughly in line with the private trade expectations. Tables 1 and 2 show the latest global estimates. For corn, the general picture is for increased global production, but the growth from South America is being reduced by the drought. As the table displays, comparing the year-over-year numbers (the far right column), most places in the world are growing more corn. Only Serbia and India are projected to have less corn production this year. Increased corn plantings, especially in Brazil, had led expectations of sizable leaps in corn production in South America. But the drought conditions have lowered those expectations in both the January and February updates from USDA.
The global soybean situation is different. In prior months, the story was similar to corn. Global production was increasing, as was South American production. But the February update finally revealed the South American drought likely has had a major impact. With the latest cuts to South American crop expectations, Brazil and Argentina are both set to bring in smaller crops than last year and that will bring global production down for the first time in several years. In November, the projections were for Argentina to have 51 million tons of soybeans and Brazil to have 144 million tons. Over the past few months, those targets have slid to 45 million tons for Argentina and 134 million tons for Brazil. That is an 11.8% decline for Argentina and 7% decline for Brazil.
Those expected tighter global supplies have supported and lifted both crops, with soybeans leading the charge. Smaller crops out of South America should open up additional opportunities for US crop exports, partially offsetting the export losses from the higher prices. So that will be the next part of the story to watch, the export sales movement over the next few months. Figures 1 and 2 show the export sales pace currently and compare it across the past few years. In both graphs, the blue line shows the sales pattern for the 2019 crop, when trade policy and tariffs dominated the export discussion. The green line shows the pattern for the 2020 crop, which bounced higher due to trade deals (USMCA and Phase 1) and buying surges stimulated by viruses (African Swine Fever and COVID). The red line shows the sales for 2021 thus far and the black line displays the five-year average pattern for export sales.
The export sales patterns for both crops were fairly similar in 2019 and 2020. Both crops were hurt by the tariffs and bounced back with the trade agreements. The 2020 marketing year turned out to be the best export year, in terms of bushels, for both crops.
Those trade similarities seem to have faded away for the 2021 marketing year. Soybeans has fallen back to the five-year average pattern, as current sales are roughly 500 million bushels below last year’s pace. USDA’s current export projection suggests soybeans will continue to track along the five-year average. And the projected shortfall in South American production does open up the possibility of stronger sales in the back half of the marketing year. China will likely be the linchpin to how exports progress. Current US sales to China are running roughly 350 million bushels below last year.
For corn, export sales for 2021 have been able to maintain a better pace, but have still slipped behind last year. It was around this time last year that China made several large purchases of corn, leading to the record export year. With the weaker South American crops, we'll be looking for some additional Chinese purchases again. Based on the five-year average pattern, we tend to have an additional 600 million bushels in export sales during the remainder of the marketing year. That pace would be in line with USDA’s projection of 2.425 billion bushels. It would be approximately 325 million bushels below last year’s export level, but the higher prices offset the bushel reduction. Compared to last year, the largest sales declines have been in China and Japan. The drought losses in South America will likely push those countries to take another look at US corn.
For 2021-22 season-average prices, USDA held firm with corn at $5.45 per bushel, but raised soybeans to $13 per bushel, a 40-cent increase. The futures markets have been more optimistic over the past few weeks and the February update did nothing to dampen that enthusiasm. As the markets closed on February 9, corn futures pointed to a 2021-22 season-average price in the $5.80 range, with soybean futures indicating $13.50. The futures price strength extends to the 2022 and 2023 marketing years as well, with corn futures north of $5 and soybean futures above $12.50 well into 2024. So, while input costs have soared over the past several months, crop prices have remained strong enough to cover those costs and provide profit opportunities. The situation reminds me a lot of the 2013 marketing year, when we began the year with strong prices and profit windows, but we ended the year with lower prices and challenging returns. While I hope we do not repeat that, it is a good reminder that now is a great time to put a marketing plan in place to capture and protect the healthy returns the markets are offering. As 2013 showed, those returns can disappear as quickly as they appeared.
For more ag market outlook, see this month’s video.
Chad E. Hart, extension economist, 515-294-9911, chart@iastate.edu
